Tuesday, December 13, 2011

Minimum Wage Law As Conduit For High Inflation?

The Fed's first QE action was an abandonment of its mandate to cap inflation.  The ECB leans in a similar direction but lacks both the political will and legal mechanisms to make big QE waves, hence the Eurocrats' push for full Continental integration.  A little inflation can turn into a lot of inflation quickly if central banks don't want to stop it by raising interest rates.  The only thing missing from the doomsday device of hyperinflationary policy is a mechanism to enact a constant wage-price spiral.

I'll nominate a new candidate for such a mechanism:  minimum wage laws.  My awesome city of San Francisco has just increased its minimum wage to $10.24/hour.  There is nothing in most locales' minimum wage laws to prevent raising the floor as frequently or as high as lawmakers would like.  Raising a minimum wage is politically popular and politicians in other areas are free to play catch-up with SF.  High unemployment would normally prevent a wage-price spiral because employers would be free to hire new labor at bargain wages rather than pay existing workers more.  Beggar-thy-neighbor minimum wage increases across the country would obliterate that macroeconomic roadblock to a wage-price spiral.  The circle would be complete once employers raise their prices to cover higher labor costs.

Economic stagnation has a lot of CFOs worried.  Rising wage costs give them one more thing to worry about.  This San Francisco action throws a pebble into the American economy that could ripple into more wage hikes, followed by more price increases.  This can easily escalate into uncontrolled high inflation.  Let's not go there.